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NVIDIA Corporation Reports a Monster Fourth Quarter

The company's graphics cards are enjoying strong demand, despite weak PC sales, and its various growth initiatives are picking up steam.

Despite a chronically weak PC market, graphics chip company NVIDIA(NASDAQ:NVDA) trounced analyst estimates when it reported its fourth quarter results on Feb. 17. Demand for gaming GPUs was completely untethered from demand for PCs, in general, and despite the company's dominant market share in the discrete GPU market, it's possible that NVIDIA gained even more share during the fourth quarter at the expense of rival Advanced Micro Devices(NASDAQ:AMD). Here's what investors need to know about the fourth quarter results.

Non-GAAP earnings per share came in at $0.52, up from $0.43 during the prior-year period and $0.20 higher than the analyst consensus. On a GAAP basis, earnings of $0.35 per share was flat year-over-year, but this number was knocked down by a $0.04 charge related to the wind-down of the Icera modem business. NVIDIA expects first quarter revenue to be $1.26 billion, plus or minus 2%, compared to analyst estimates of $1.23 billion.

Strong demand for gaming GPUsNVIDIA gaming revenue jumped to $810 million during the quarter, up 25% year-over-year, driven by strong demand for the company's high-end graphics cards. During the past few years, NVIDIA has run away with the discrete graphics card market, raising its unit market share above 80% and pushing AMD into a distant second place. The GTX 970, in particular, has been an incredible success for the company, claiming the top spot in terms of popularity among Steam users, according to Steam's hardware and software survey.

The market for gaming GPUs is behaving completely independently from the market for PCs, which puts NVIDIA in the enviable position of being a PC-centric company that hasn't felt any real negative impact from slumping PC sales. Later this year, both NVIDIA and AMD are expected to launch brand new graphics cards, giving AMD an opportunity to win back some market share. Until then, NVIDIA's dominance of the market only appears to be growing.

Data center is growing againDuring the third quarter, data center revenue actually declined slightly with NVIDIA blaming the timing of certain deep learning projects. The good news is that the data center segment returned to growth during the fourth quarter, soothing any fears that this slump in sales was caused by a deeper issue. One of NVIDIA's major initiatives has been pushing its GPUs for machine learning and AI applications, and that effort appears to be paying off.

In November, IBM announced that its Watson cognitive computing platform was getting an upgrade, integrating NVIDIA's Tesla graphics technology in order to provide a 1.7 times increase in speed. In December, Facebook announced that it was using NVIDIA's GPUs in Big Sur, a computing platform designed for machine learning and AI. While the concept of machine learning has been around for decades, it's still a relatively new technology in terms of real world applications, and NVIDIA is positioning its graphics technology to be at the center of this major trend.

Automotive sales driving Tegra growthNVIDIA's DRIVE automotive platforms, which power in-car screens and advanced driver assistance features, are a major long-term growth opportunity for the company. During the fourth quarter, automotive sales continued to grow rapidly, becoming large enough to generate significant growth for the Tegra segment.

NVIDIA had early success with its mobile Tegra processors in the mobile device market, but the company has since shifted gears, focusing mostly on its own gaming devices like the SHIELD Android TV console, as well as the automotive market. Tegra has been a drain on NVIDIA's profits in recent years, and the segment is likely still unprofitable. But if automotive sales continue to grow at a breakneck pace, it won't be too long until Tegra begins generating meaningful profits for the company.

It was another extremely strong quarter for NVIDIA, with the company defying expectations and delivering growth despite the weak PC market. Demand for gaming GPUs appears to be robust, and while AMD will challenge NVIDIA later this year with its Polaris graphics architecture, NVIDIA's Pascal GPUs will bring similar gains in performance and efficiency, making it difficult for the No. 2 player to win back meaningful market share.